The world economy, which had been projected to register measurable growth this year, seems to be losing its growth steam. According to the
Consequently, developing countries that rely on capital flows from developed nations might witness a shrinkage as the investors experience hardships in their own home towns. This might in turn hamper growth for developing nations as well.
Although its credit rating was maintained at BBB, the negative progression of its economy is indicating that a credit rating downgrade is a near possibility.
Meanwhile, S&P proceeded to downgrade the country's long term foreign currency sovereign credit rating to just above "junk".
This was to the detriment of both the rand and their bond market which took a nose dive following the negative news.
The ratings companies cited the mine strikes in the country, which have been ongoing from nearly beginning of the year, as the main reason for the downgrades.
Platinum output has since been lower than same period last year and has showed just how much the South African economy is dependent on a booming mining sector.
Coupled by a decline in manufacturing output, GDP in
Back home, the country was not spared from the downward revisions.
They indicated the country is exhibiting some structural weaknesses and its anchor sectors for growth are seemingly gloomy, due to lower output and unfavourable world market prices.
The downgrade did not come as a surprise for many. The market has always been skeptical of the 6,1 percent growth forecast by the
Furthermore, the IMF had initially been least optimistic of all with a projected growth figure of 2,4 percent for 2014. However, we are getting close to mid-year and there has not been any corresponding growth revisions by the Government.
Is it realistic to continue forecasting a 6,1 percent growth when pointers on the ground suggest otherwise?
On projecting economic growth for 2014, the mining sector is expected to contribute a significant share to this growth. However, challenges in this sector are seemingly never-ending, with mainly the lack of capital being the major hindrance to pursuing exploration projects. Already, from statistics that we have, mineral output for the first quarter of the year has dwindled.
Production levels are not where they should ideally be to derive maximum benefit. In addition, minerals have always been a volatile resource by value, due the instability of their prices on the world market.
For example, year to date, gold price has increased by over 9 percent compared to a 27 percent decline in 2013.
World market analysts are of the view that the momentum is not long term and it might just be as a result of safe haven buying on the back of renewed conflict in
Given such, our mining sector is therefore vulnerable. With a lower output than forecast and a volatile commodity market, value can only be lower than expected.
Agriculture, on the other hand, is cumulatively underperforming. The tobacco crop, which is expected to contribute immensely to the growth in the agricultural sector is not yielding desired results. Although the amount of tobacco delivered to the auction floors has risen relative to last year, prices have been depressed. Compared to the average price of
Quality of the crop has been pointed out as the major detriment to the value of the crop. The small scale tobacco farmers, which now dominate the sector, lack the expertise, as well as the equipment which ensure their crop is of high quality. Therefore the value of the tobacco crop has increased by a negligible amount, not enough to support the 9 percent growth forecast for agriculture in 2014.
Other crops such as wheat and cotton are continually contracting in output due to many reasons, among them the switch to cash crop farming by former wheat and cotton farmers.
Exceptionally, the output for maize was better than expected which is a much needed positive in the sector. Regardless, it remains below the grain demand of the country and there is still need to import the difference.
As an opinion, if we are still unable to be self-sustainable in terms of grain production, then no harvest is bumper harvest until that happens.
Clearly the sector is embroiled in its own problems and a growth of the expected magnitude seems out of reach for now. In addition, lagging indicators are not painting a rosy picture. Inflation has dipped into negative and was -0,19 percent as at end of May. Consumer spending has been declining a phenomenon blamed on lower disposable incomes.
With many companies struggling to stay afloat, some have resorted to retrenchments, while other are struggling to pay salaries timeously and in full. As a result, most consumers are incapacitated in terms of purchasing power and have therefore resorted to buying just the basics for their survival.
Big giants such as
Retailers such as Truworths and Edgars have resorted to becoming creative with their credit offerings as a means to incentivise their customers to increase spending.
Nevertheless, they do not foresee meaningful growth, if any for the year 2014. Economics tells us that consumer spending constitute the biggest proportion of GDP. With current spending patterns, it is almost a given that a 6,1 percent GDP growth for 2014 is not attainable.
It is understandable why the Government would be hesitant to revise the growth figure downwards.
After all, the country has a lot of idle capacity and the deflationary gap is huge. Therefore it would be ideal for the country to make huge leaps in terms of growth so as to catch up with its peers in the region. However, realistically, the economy seems to be sliding backwards and a 6,1 percent growth target might not be achievable this year, unless its short of a miracle.
Pressures on recurrent expenditures continue to mount on the fiscus, and considering the little resources available and lack of budgetary support, capital projects will have to be sacrificed.
Coupled with a not so rosy global economic outlook, investments into developing country are obviously going to shrink.
A downward revision of growth is inevitable to give the true picture of all factors at play. Acknowledging where we are would actually be a starting point for everyone to use their noodle. Consultations which feed into the mid-term budget review can then focus on the right policies necessary to push the economy forward and possibly achieve significant growth in the coming year.
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